What Is A Bring-Down Certificate of Representations and Warranties?
In continuing with the series of discussion regarding closing documents required in the transfer of a business, in this article we will discuss the closing document known as the ‘Bring-Down Certificate of Representations and Warranties’.
Bring Down Certificate of Representations and Warranties
A Bring-Down Certificate, or otherwise known as a Certificate of Representations and Warranties, is another document that you will find in every purchase of a business regardless of circumstance.
What is this certificate? It is a confirmation by the Seller that all the representations and warranties set out in the agreement of purchase and sale are true and correct on the closing date. Often times, the certificate will set out that the reps and warranties will continue to bind the seller for an additional 1, 2 or 3 year period. This is important as the representations and warranties are said to induce the purchaser into buying the business in the sense that they confirm several important matters as to the efficacy of the business or the assets. By having the reps and warranties survive after closing for a period of time, this allows the purchaser to sue the vendor in the event any of these reps and warranties later prove to be untrue.
What are Representations and Warranties?
In every agreement of purchase and sale there are representations and warranties of the selling business. These statements ‘represent’ and ‘warrant’ that the selling business is not indebted to the CRA for taxes owed, they warrant that the sale has been duly authorized by the shareholders of the selling corporation, that the has been no violations of any law in the operation of the business, that no fundamental changes have occurred since the date of the initial agreement, that the seller has good and marketable title to the assets which are to be sold, and that the assets are free and clear of all liens and encumbrances and that the seller has not entered into any other agreement to sell this same business.
The list of representations and warranties can be quite long, including representations certifying that no environmental violations have occurred and no claims under the Employment Standards Act, WSIB or other licences and permits germane to the particular business.
The question then is, if all these statements are set out in the agreement between the parties, why do they need to be confirmed once again in a ‘bring-down certificate’ on the closing date.
The reason for this is due to the doctrine of merger. The doctrine of merger is an old common law principle in contract law.
The doctrine of merger states that all prior negotiations, statements and agreements – including the purchase agreement – are deemed merged on closing which is when the purchase agreement comes to an end. This means from the date of closing, these important reps and warranties that induced the purchaser to enter into the agreement and buy the business, will no longer be binding on the seller.
For this reason, a ‘bring-down certificate’ is required. A bring down certificate quite simply ‘brings down’ the covenants of representations and warranties from the purchase agreement, to a separate document that survives for several years after closing.
The bring-down certificate is then, a way around the doctrine of merger in the sense that it permits the representations and warranties to survive after closing. In this way, the purchaser will have the ability to sue the seller of the business should any of the reps and warranties later turn out to be untrue.
For this reason, a Certificate of Representations and Warranties, or a Bring-Down Certificate is an essential document to any closing.
-Shira Kalfa, BA, JD, Partner and Founder
© Kalfa Law, 2018
The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.